The Production Possibilities Curve, also known as the ...

Production Possibilities Curve

Hello! My name is Alyceson-Grace Eke from the UNT Learning Center, and today we will be

covering

the Production Possibilities Curve.

Defining the PPC

First, let¡¯s pose the question: What is the Production Possibilities Curve?

The Production Possibilities Curve, also known as the Production Possibilities Frontier, is a graphical

representation of all potential allocations of two resources. The two resources are either capital goods,

like guns and machines, or consumer goods, like food and shirts.

Elements of the Curve.

The curve itself can either bow out or stay straight. It will tell whether the goods have perfectly

substitutable resources - that¡¯s when it¡¯s straight - or imperfectly substitutable resources - when the

curve is bowed out.

The curve also represents opportunity cost. Opportunity cost is the sacrifice one makes for their current

decision. The straight line shows a constant opportunity cost and the bowed out line shows an

increasing opportunity cost.

Tl;dr - Perfectly substitutable resources have a constant opportunity cost. Imperfectly substitutable

resources have an increasing opportunity cost.

Outcomes of the PPC.

Let¡¯s draw a PPC. Here are all the potential outcomes of any PPC.

Outcome #1: Inefficiency [Point C]. Any time there is a point within the curve, we are being

inefficient. That¡¯s because the curve also shows the most we can produce. Anything below that means

we aren¡¯t using all of our resources.

Outcome #2: Efficiency [Points A & B]. If we are along the curve, we are being efficient. We are using

all of our resources.

Outcome #3: Impossible Production [Point D]. Any point past the curve is impossible at the time. We

do not have the resources to produce the combination suggested. It goes past maximum production, so

it¡¯s impossible.

Calculating Opportunity Cost

To calculate the opportunity cost of a good, look at the numbers on the axes and find the number

change based on a one unit difference in the good in question.

Good A

24

20

16

12

08

04

0000

04

08

12

16

20

24

28

Good B

Example 1:

In this graph, the PPF is straight. Let's look at one of the first points on the curve, where you

have 24 units of Good A and 4 units of Good B. If we move to the next point, we have 20

units of Good A and 8 units of Good B.

Question: How much of Good A do we have to give up for one unit of Good B?

Let's see. We lost 4 units of Good A and gained 4 units of Good B. How do we know the

opportunity cost for one unit of Good B? Set it like a ratio - Good A losses to Good B gains.

Then, reduce the ratio until Good B gains are one. Since the ratio is 4:4, we need to reduce

the ratio to ?:1 . To do this, divide both parts by 4. 4:4 becomes 1:1. Therefore, for one unit of

Good B, we lose one unit of Good A.

Good A

24

20

16

12

08

04

0000

04

08

12

16

20

24

28

Good B

Now, let¡¯s try to do a problem that covers everything you need to know about a PPC.

Scenario: The Kingdom of Sardina produces Abbacchio Donuts and Bruno Bagels.

The production possibilities frontier is displayed here:

Abbacchio

Donuts

24

20

16

12

08

04

04

00

08

12

16

20

24

28

32

36

40

44

48 52 56 60

Bruno Bagels

? Are the resources perfectly or imperfectly substitutable?

? Are opportunity costs increasing or constant?

? At the red icon, are we inefficient, impossible, or efficiently producing?

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